Over any given period in the market, there are bound to be companies raising capital. After all, access to equity funding is one of the primary reasons many companies list in the first place. Equity raisings are closely scrutinised in the market because of their potential to dilute shareholder value. If companies are able, they typically use internal cash and debt before ‘tapping the market’. The various advantages and disadvantages of capital raisings have been widely discussed but one aspect that receives little attention is how the raising’s structure can be a significant factor in its ultimate outcome. We believe management should seek to dilute existing shareholders as little as possible to preserve the share price and maintain control over their share register. Raisings should also be timed at points of strength rather than weakness wherever possible. They must also have a clear, well-articulated purpose to be achieved within a stated timeline. Ideally, they should offset any dilutive impact with an improved shareholder value proposition.
Two of our own portfolio positions, Collins Foods (ASX:CKF) and Qube (ASX:QUB) recently raised equity, with very different receptions from investors. Naturally, we look at these two examples as case studies of what to do and what not to do, particularly as they both raised around 10% of the market value at the time. At the very least, they provide helpful insights into how we as shareholders should want businesses to act in order to preserve and grow invested capital.
CKF’s raising was primarily via a $54.5 million institutional placement underwritten by UBS and Wilsons. In layman’s terms, it was an open offer to select institutions at a set price of $5.25, an ~11% discount to CKF’s share price at the time. We were immediately critical of this structure because, by not including an entitlement offer, it disadvantaged existing shareholders by not directly providing them the opportunity to preserve their proportionate ownership of the business. This inevitably led to dilution across the register. Equally problematic was the fact that CKF concurrently announced a minor downgrade to its core business, which was facing some cyclical pressures in Western Australia. As a result, the discount within the offer price had to be larger than it would otherwise have been. In other words, the structure and timing of the offer were poor. Ironically though, the market was almost uniformly supportive of the purpose of the raising – to opportunistically gain a foothold in the underpenetrated European market – the share price almost immediately fell around 15%, markedly below the placement price.

Figure 1. CKF raised equity on 23 March – begun trading 24 March
Source. StocksInValue

QUB’s $350 million raising on the other hand, was done via a $228 million entitlement offer at $2.35 per share, and a $122 million placement prioritising existing shareholders, undertaken at an average of $2.42. Entitlement offers allow existing shareholders to proportionately participate in the raising so that their ownership stake is not diluted. Giving existing shareholders preference in the placement was also wise because it allowed QUB to maintain greater control over its register. The raising would be partly used to fund its Moorebank intermodal terminal, a capital-intensive project with wide market support and high value creation potential. The remainder is being used to pay down debt, opening the balance sheet for future growth opportunities. QUB had experienced a strong share price run over the preceding months and leveraged this to maximise the value of the raising. By providing positive updates about Moorebank and its operating conditions, it set a positive tone which was comfortably received and supported by its existing shareholders.

Figure 2. QUB raised equity on 31 May – began trading 2 June
Source. StocksInValue

As a result, QUB has held its share price while CKF has lost some support in the market. Both were sensible raisings but the manner in which they were offered and the way they were contextualised led to very different investor reactions. We believe this is an area of governance not given enough attention in the Australian market, particularly given it can have such a profound effect on short and medium-term outcomes for investors. We firmly believe that companies raising equity should always seek to minimise dilution to existing shareholders, precisely define its strategic intent and, raise in a context of market support.
Clime Asset Management owns shares in both Collins Foods and Qube.